Monday, September 29, 2008

Now what? before & after - parsing the interests of bailout

Who has money at risk? The US taxpayer.

Since this is an EXTRAordinary event a more balanced set of risks can be fashioned if:

SOME SKIN IN THE GAME if ANY commitment of US taxpayer funds

As previously suggested, in "RECYCLING OLD Wall St compensation" Wall St and the other financial services institutions managements, boards and employees should contribute some personal funds to a set of solutions. AND take a second place interest BEHIND the return OF and the return ON US taxpayer money.

The taxpayer rightly or wrongly feels that:

  • They get to keep their jobs, get a paycheck (at taxpayer expense!), in cleaning up their own problems - things could be a lot worse; just ask an auto worker, flight attendant or pilot.

  • The US treasury proposal fails to pin money responsibility on those most in the position to have known better;

  • Same proposal will, as previous extraordinary rescues (at taxpayer expense), fail to deliver a cure as promised;

  • Liquidity band aids the fracture - it can act as a temporary solution only;

  • Liquidity DOES not, as stated on in JULY 2007, address the REAL immediate problem - that is credit default, due to asset values continued decline;

  • The REAL cure is to allow all markets to proceed on their own - let private market players balance it all out - no matter how painful.

  • The taxpayer understands that markets need to self - correct; not all goes up (or down) in a linear fashion.

ONE FINAL Q-U-E-S-T-I-O-N FOR THE TV Business media

Today is Monday, September 29, 2008

TV Business media (the usual cast) is in such a questioning frenzy TODAY - stirring up debate, looking for answers, one even chest thumping "WE own this story" really?

Where were they in the 16 quarters spanning 2004, 2005, 2006 and 2007?

Watching the PARADE of analysts-estimate-beating, RECORD Wall St EPS announcements get what? A Cheer! When scrutiny was the more appropriate news angle, not to mention the primary job descriptor and RESPONSIBILITY of a journalist.

Sunday, September 28, 2008

Where do I sign? - now that I'm a fiduciary (to the US Taxpayer)

Prudent fiduciary governance applicable to the US Treasury (for and on behalf of the US Taxpayer) requires a signed written acknowledgement of fiduciary responsibility from the Wall St firms, banks or other financial institutions which are to receive cash from the US Treasury.

Lets see how many firms do so.
  1. Let's see how the US treasury uses this historic event as a-once-in-a-lifetime opportunity for learning / educational tool for ALL investors.
  2. That an upfront planning process is critical.
  3. That the asset to liability match is critical.
  4. That full disclosure (Reg. FD) is the best disinfectant to financial accounting issues; off balance sheet financing / insurance is a slippery slope.  Let the analysts do what they do best; analyze board and management representations.
  5. That diversification is more important than profits.
  6. That a respectable business reputation is earned every day; the result of a cycle of evidence-based continuous improvement in people, process and philosophy.
  7. That fiduciaries raise their hands when they FIRST realize that they can't outperform a benchmark or other investment mandate; inform the beneficiary it's now time to consider another asset manager.
  8. That protecting, taking steps to insure the return OF and the return ON US Taxpayer monies is more important than supporting a financial institution or insurance company.
  9. That "protecting" US financial institutions does not require so much NEW regulation; NEW regulators; rather enforcing existing - example; not all banks got into trouble; JP Morgan is the most prominent example of a money center bank - it's management chose (an action verb!) NOT to use as much leverage as their competitors.
  10. That the interests of the US Taxpayer / beneficiaries be in UNdisputed first place; not best interests; SOLE interests.

It's all about protecting the interests of the US Taxpayer!
Prudent Fiduciary Governance is where it begins. 

Saturday, September 27, 2008

Why not? - Private Investors - Targeted Tax Holiday for MBS & ABS

The US Treasury proposal to commit up to $700 Billion to "shore up" banks and Wall St's balance sheet is The Riskiest for the US taxpayer because it sends cash today (or in drips) OUT of the Treasury.

Policy makers state today's values of MBS and other Asset backed securities (ABS) are at, as Chairman Benanke suggests, "at fire sale prices" indicating a belief in a transient diminution of value; if correct then private investors may have appetite given the correct set of incentives.

A much less risky solution, requiring no UPFRONT outlay of US Taxpayer cash could be fashioned with an IRS-supported targeted tax holiday for private investors; such as for example.

For MBS and ABS securities purchased from today thru end of 2008 - gains on sale / marks qualify for a tax free basis.

Later variations on this theme should gradually increase the incentives to establish positions / basis sooner than later; with later positions subject to a less generous set of tax incentives.

Another potential solution
Title IX housing program policy could be reworked and applied to an investor's purchase of MBS / ABS today - such that tax incentives enhance the private market's opportunity set.

If as another blogger suggests, that the US Treasury enjoys a spread capture of over 10% due to it's structural borrowing advantage; given similar incentives the private investor SHOULD be first extended the opportunity to bid; it's a prudent, natural step in the US Treasury's fiduciary duty to the taxpayer.

Thursday, September 25, 2008

Did previous bailouts cure what they promised? NO

BEFORE the PREVIOUS bailouts

we were politely informed of the threat that
IF WE DID NOT agree to:

+ BEAR STEARNS - $29 Billion
+ FANNIE MAE, FREDDIE MAC - $200 Billion (early estimate)
+ AIG - $85 Billion

Rates on loans to the people for:
+ Mortgages,
+ Autos,
+ Student loans,
+ Small business
would spike much higher; Mr Paulson and Mr Bernanke implied more draconian consequences.

Loans IN FACT have not dried up; rates have NOT spiked!

None the less each bailout has been billed as something "extraordinary" “we had to do” and “this time will be the last” - when will the hyperbole and bailouts stop? That has an obvious answer – when the “monkey” is back in the hands of those who created the problems. And our government officials learn what independently determined cause and effect truly is!

How did the “monkey” grow into a “gorilla”?
Wall St / Financial Services may have, either implicitly or explicitly, borrowed and leveraged, reportedly as high as 30, 40, 50 to 1 against long term paper, borrowing short term, to capture the spread.

Recognizing the obvious – "when not if" problems
Isn't it curious how the masters of the universe’ / financial engineers' models failed to recognize the obvious unsustainable rise in real estate values.

POTS - Part of the Solution

The Treasury / SEC should create (but not commit taxpayer dollars) an anonymous virtual "auction" agency and let all potential investors see what might be put up for sale / bid - NOT who's selling it!

Private money bids - are the most efficient at assessing risk, and the most efficient use of resources. This requires very little US taxpayer money; admittedly it may take a bit longer - but offers promise of a "better market-based solution".

Wednesday, September 24, 2008

SHINE the light, shine the light...

Where it properly belongs - a high powered spotlight needs to be cast on the:





Wrapped and Blessed in


shaken and stirred with the extra garnish;


(Specifically, borrow in the short term market against long term paper to capture the spread or so it is hoped - as long as the spreads exist!)

ON THE CONTRARY - the future of consumer banking:

Local bankers, I believe, will revisit the deep roots of their communities, extend a loan to a neighbor, someone who they can look in the eye and whose handshake seals the loan for a house, car or student loan or small business capital. Loans such as these are the easiest credits to evaluate - banks have made these types of loans for decades - why would this time be any different?

Defeat US Treasury Bailout - Previous bailouts did not prevent...

Do our elected representatives have a fiduciary duty to the US taxpayer? It seems to be YES

Therefore vote: NO - The bailout as proposed may cause certain aspects of the credit markets, especially short term, to choke up; it is abundantly unclear that any such rescue would PREVENT consequences predicted by Mr Paulson and Mr Bernanke. The past has told us - Previous bailouts have not worked as billed.

A bit o' history - a bit o' future

Michael Milken always said a AAA rating is the best it will ever get; it's all downhill from there; perhaps the proud owners of today's handful of corporate, government and agency AAA ratings might pause to reflect on what they can do to honor, respect and do whatever it takes to insure that they continue to maintain that extreme level of confidence. If not, what will a new benchmark for sovereign debt consist of?

Tuesday, September 23, 2008

US Treasury Bailout - Mandatory Puts if US Taxpayers rescue the patient

The US Treasury proposed $700 Billion bailout of Wall St and the Financial Services industry (FSI) assumes the patient has total cancer. Implying an absolute necessity that the US taxpayer must pay good $ to the patient in exchange the people get to hold onto ONLY the cancer; something again does not pass the smell test.
MOST IMPORTANTLY - If the repercussions of not enacting are that great, then have the US taxpayer support the future issuance of credit, did you hear that? The Future issuance of student loans, car loans, mortgage loans. etc. - NOT THE BAD LOANS from the PAST!

Mandatory Puts back to Wall St!
If the US taxpayer puts up even one dollar sopping up Wall St's leveraged errors in judgment (securities) then we should insist that in 3 or 4 or 5 years time a "put" triggers Wall St or its assigns (not dischargeable in bankruptcy) repurchase from the US taxpayer with interest.

This time is DIFFERENT - make no mistake - it's not the nostalgic era of 1990's RTC; nor is it the 1987 stock market crash, nor the 1998 Russian ruble / LTCM panic; it is more like the 1930's given the elephant in the room - LEVERAGE. The public must recognize, Wall St's / FSI institutional and hedge fund leverage in the late 1980's / early 1990s was a nanospeck compared to today's $62 Trillion credit default swaps market - much of which relates to real estate and mortgage backed securities and derivatives thereon.
Reminder, implicit or explicit leverage was the "cause" of the excellent profits from back in the day AND those huge bonus checks the masters of the financial universe took they cry out for the rest of us to share in the pain; hey bro we didn't begrudge your remuneration in the past so what right do you have to come to us for help now? It doesn't and shouldn't work that way.

Showdown at "Bailout Alley" - will Congress blink?
Mr Paulson and Bernanke would have us believe, if Congress does not grant these "authorities" great harm would occur to the US economy; really? Economies, sectors or industries naturally experience ups and downs, BOOMS and RECESSIONS; go ask the citizens in the Detroit and Cleveland areas. The Administration has trumpeted very recently that the economy is not in a recession and is "strong" hmmmmm.... what changed in the past 2 weeks? "What did they know and when did they know it" should jump to mind.

Bailout does not address / cure the problem for the people
Although Mr Paulson and Bernanke state "great harm" is in store for Main St. if we don't give them the $700 Billion authority
1- I'm hard pressed to find a direct cause and effect link to that premise. Very few, if any, upside down homeowners are unlikely to see ANY benefit from this "cure-all".
2- Secondly, where are those with memory? I thought we heard both of them say that Bear Stearns would be the first and last bailout, or was it Fannie and Freddie or AIG? It's beginning to look like a pattern here; or is it not a surprise that Mr Paulson is using the only tools he knows? Lets make a deal! More glaringly where was the SAME SENSE OF URGENCY during Katrina?

Many observers AND ALL WALL STREETERS know that ALL markets hit speedbumps; are NATURALLY prone to extremes: at the zenith of hope and optimism (2004 thru 2006/7) and despairs at its depths, 2008 thru ?? However, eventually begin to function again ON THEIR OWN; there is no shortage of smart people on Wall St. who could figure out how to make money.

This time is different - YES but we need to see the actual bottom first
We find ourselves in a VERY unusual UNcomfortable position - this time is different; the pain will be intense (it's only money though) in the future the recovery I believe may be the strongest ever seen; however we need to let the absolute bottom happen; push through it.
IF we let the patient recover on its own.

NO US taxpayer dollars to bail out Wall St - it simply requires a little lifestyle change from business as usual!

Recycling OLD Wall St Compensation = POTS

Would recycling those greenbacks from back in the day be part of the solution?

IMAGINE, yes imagine if Wall St.'s boards, management and employees aka financial engineers commission, bonus checks, stock grants of yore could be placed on the table; at the same table, importantly as a second place-holder, behind the interests of the US Taxpayer.

If recycling is not palatable or acceptable to Wall St. ask anyone in the Airline business - what salary concessions, compensation cuts are all about; and the sacrifices that are required when times are tough.

Further; be reminded that Wall St.'s wildly profitable successess of the recent past & problems of today are indeed ALL SELF CREATED; not so with the airlines; innocent victims of 9/11.

Yes these monies may not be much compared to the proposed $700 Billion but could be seen as at least a symbolic demonstration of confidence in their own cooking and a modicum of good faith Wall Streeters are asking the US Treasury and US Taxpayer to contribute to their collective rescue; corporate, jobs, families and communities. 

It's all about alignment of interests and resources to a common goal!

L - E - V - E - R - A - G - E = root of Wall St. Financial Services crisis

In testimony today before the Senate banking committee, Secretary of the Treasury Paulson fails to state the word LEVERAGE; the crisis IS CAUSED by Wall St's extensive leverage of complex, illiquid mortgage backed securities, derivatives and insurance thereon. It's not just that these firms invested in mortgage securities - no matter how complex - it's the fact that they DECIDED to leverage investments in same! Why? To make even more money.

In the past 5 years NO ONE, I REPEAT NO ONE ON WALL ST, UPON RECEIVING A PAYCHECK OR A BONUS CHECK OR STOCK OPTION GRANT - raised their hand or voice to state; "Something's not right - my compensation is too high!!!" DID THEY?

Many Wall St firms aka the Financial services (FS) industry learned what hedge funds were doing; outperforming a benchmark by juicing performance with leverage, they imitated that behavior and added even more leverage, especially to securities related to an asset class that was black & white overvalued by ANY measure; real estate.

Wall St (FS) borrowed, also leveraged heavily against other asset backed securities including credit cards, auto loans, boat loans, aircraft loans, student loans and other exotic assets and cash flows - these assets were then securitized (another source of revenue) in various classes, traunches and to many different investors.

Further, credit enhancements on these "securities" so called default insurance, (in a further incarnation, credit default swaps) was underpriced; perhaps due to one particular player's (lacking true capacity) actions, market share gobbling, anti competitive behavior; often sanctioned / blessed by the "independent" credit ratings agencies. Can you spell AIG?

In the past Mr Paulson promised Congress that Bear Stearns rescue bail out was EXTRA ordinary, really?

Since then we've Fannie Mae, Freddie Mac, AIG, now it's just cash - now "we need the (tax payers) cash" to preserve the management of FS companies; to even consider that company management be allowed to continue to run these companies is imprudent and revolting.

  • Why should or would the US taxpayer let the decision makers of the past continue at the helm?

  • Where is the US Treasury's prudence - in selecting / allowing agents of better decision making on behalf of the US Taxpayer?

  • How does the judgment or process of the US Treasury lend example / teach the FS industry, or demonstrate a prudent fulfillment of its fiduciary duty to the US taxpayer?

Keeping it REAL

Markets ultimately exist to serve the people - it needs to be a real market - let the chips fall where they may - yes some companies will fail and restructure but the clearing price will signal to ALL that markets work - for better or worse. That's the risk / price / value of an asset or collection of assets or set of investment behaviors.

With a FS industry as concentrated as Paulson suggests we need to let that industry rise and fall ON ITS OWN - as the players (they all wear BIG BOY pants) have clamored for, pounded the table, kicked their heels, indeed demanded and lobbied for the past 25 years! To state that the industry is too interconnected and requires a bailout fails to appreciate that diversification, as in all other businesses and more importantly credit markets- is one thing; PRUDENT. Look it up!

Sunday, September 21, 2008

US Treasury Bailout for MBS - NO!

Chris McConnell & Associates
Independent Qualified Fiduciary
Audits Training Expert Witness

Rather a better solution requires the Financial Services Industry; FSI to propose, implement and accept the risks of a multi-year solution; but not the US taxpayer; however cloaked.
1) VOTE No to government bailout, US Treasury plan.
2) The financial services industry, FSI inclusive of commercial & investment banks, broker dealers, insurance companies, credit ratings agencies created the problem; an artificial “market” for Mortgage backed securities, MBS.
3) FSI accepted the fruit from leveraged gains of the past - not the US taxpayer.
4) Therefore the US taxpayer should not bail out these entities.
5) The US Treasury plan simply does not address an inescapable issue; real estate values have been and remain dislocated from personal incomes.  Further, regrettably the US’ jobs picture is negative and getting worse; overcapacity exists in most industries, notably the Financial and real estate related industries.

An FSI – based solution has the best chance of success, in keeping with a self policing / self regulatory regime / market – based approach
There is no perfect solution, however, a better use and alignment of interests / resources, free market approach, best chance of success is an industry (Financial Services Industry) solution including the credit ratings agencies (S&P, Moodys, Fitch, et al) and hedge funds.
Temporary, extraordinary waiver of anti-trust regulation may be required.
ALL of those parties need to band together now – as they ALL did in the past in creating this “artificial” market for toxic MBS securities, derivatives and insurance thereon.

The FSI collectively is in the best, most advantaged position to model, price & evaluate risks of RMBS & CMBS and derivative securities.

The Cause - No one in FSI raised their hand in the past did they?
The outsize FSI profits were earned in the full light of day of boards, officers, auditors, regulators, shareholders and debt holders.
The FSI didn’t complain in the past when the models were showing huge "paper" profits; paying out vast sums to officers and employees.
Same profits INCLUDED a CEO’s personal certification of internal controls.

Closing comment – greed and or failure to admit mistakes, take losses
Many have criticized Wall St. CEOs, like Richard "Dick" Fuld that he or LEH board could have, in the recent past, raised capital and increased the chance of his firms’ continued survival.
Similarly, AIG, by way of example, but not in isolation, could have, in the past 12 to 24 months sold off or at least reduced some of its concentrated holdings in its non-Life, Property / Casualty FPG (Financial Products Group) correct? Rather they decided to hold these contracts; the epitome of self interest, hubris and ultimate greed!

Lastly where is the voice, the voices of self - regulation?
Those loud voices of SIFMA (the creation of the SIA and BMA), ICI and US Chamber of Commerce NOW?
Let them:
Stand up
Raise their voices
Take responsibility now
accept fiduciary responsibility to the US taxpayer
i. A more impressive, peerless collection of intellectual capital does not exist.
ii. Let’s see if they have, when times are tough, collectively the character to propose and implement a prudent plan of action;
iii. In the sole interests of the US taxpayer, as fiduciaries should.

The VERY LAST WORD - Leverage & Margin
Drastically reduce it – come on, 2 to 3% margin on MBS and related is like an Indy race car, trying to maintain speeds of over 200 mph on city streets; endangers innocent bystanders, indeed plainly perilous and reckless.

Stocks require initial margin of 50%; some have more; but when it comes to MBS and related securities, derivatives margins could and SHOULD BE raised to levels that approach prudence.

With over 25 years combined securities and expert experience Chris McConnell & Associates provides independent, conflict-free fiduciary training, audits, expert witness and litigation support in FINRA (NASD), ERISA and 401k plans, Non-profits, Foundations and Endowments; Trust, Estate & Probate and Marital Dissolutions regarding issues of fiduciary duty, suitability, diversification, employment benefits and compensation for the financial services industry.


If you would like more information about this topic, request a CV Brochure or to schedule an interview kindly contact Chris McConnell, AIFA at (310) 943 – 6509 or visit